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Saturday, April 11, 2015

A Letter From Ireland

The
Irish government would never have made the cuts and structural reforms that
were necessary to save the Irish economy without being able to look for cover
behind those bad Germans all along the way. What we would have done, as our
history can prove, decade after decade, is pretend that there were no
structural problems in the economy, that corruption and clientelism were just
part of our friendly culture, and sadly we would have continued to export our
children like cattle to the four corners of the earth. Does this sound
familiar, Greece?

A
people that are far-sighted and generous enough not to sell out the next
generation are a people I admire. A country that took East Germany on its
shoulders resulting in a 20 per cent cut in wages for West Germans is a country
I admire. Solidarity is not just a populist term of the left in the land of
Goethe and Schiller; they mean it. So the next time I drive over the viaduct
that traverses the Manchester Ship Canal heading north on the M6 towards the
tiny village of Hambleton in Lancashire to visit my wife’s relatives who left
Ireland for England in the 1980s, I’ll look at my two young daughters in the
rear view mirror, turn up the volume of Brahms’ German Requiem on my CD player,
and say “Danke danke danke”.

38 comments:

Sounds maybe strange for a lot of people but Requiems are always the most beautiful classical compositions. For me. And obvious also for the Irish Cormac O’Donnell. These compositions have a message in itself that can be understood without words. But this story at least offers a possibility to understand this man's deep gratitude.

Thank you for sharing, Herr Kastner.

German Requiem, with Karajan and the Vienna Philharmonics:Karajan Wiener Philharmonikerhttps://www.youtube.com/watch?v=LydPLNdob1c

As always, the Germans avoid dealing with awkward facts that contradict their opinions (and naked self-interest). There has been no discussion, to my knowledge, about the OECD report showing that Greece implemented massive reforms. Propaganda rules OK, especially if your name is Schaeuble.

"Greece implemented massive reforms" ...? Could you please enlighten us about these "reforms", where and when they were "implemented", and what you mean by "reforms". I hope you do not mean that cutting pensions and increasing taxes and things like that are really "reforms."

To quote Wiki: "Reform means the improvement or amendment of what is wrong, corrupt, unsatisfactory, etc". We all know that Greece has done nothing against for instance corruption.

@ Anonymous April 11, 2015 at 8:26 PMThis is from the OECD report. Read the Coppola blog linked above to see Frances' view (which is also mine).

Since the OECD is the main intergovernmental agency of the developed world for evaluation of economic policies, their view cannot be dismissed so lightly. The question is what reforms were demanded of Greece, and what Greece actually did. That is the question they address.

So, we come back to the usual position that I have taken: the Troika was not actually interested in reforms but in forcing Greece to balance its budget and pay debt financing, whatever the cost to the economy and people.

Complaining that the Troika reforms were useless at best, and damaging at worst, is precisely the position adopted by Varoufakis.

why was the first part of my letter to the FT not published in this blog? It highlighted that I am a public servant and my wife and I had our income cut by over 15%......surely this contextualises my views.....Cormac

I'm pro Europe, I just happen to believe that having lived in a country that has had so many problems that were similar to the ones Greece has at the moment I've seen a way our for us and I stand by what I said, unless the Troika had come and implemented the necessary cuts, we would still be in a mess here. I agree that the way the EU is structured suits Germany in particular their export lead economy but I just wanted to put some balance on the discussions across Europe that always holds Germany up as the bad boy, the Germans gave us millions in structural funds to build roads and schools in the 80's when we had nothing and I am grateful to them for that, I have travelled to Germany many times and I honestly believe that they have the interest of all Europeans at heart but that doesn't mean they can be foolish with their taxpayers money either, they are not one of the most successful countries in the world for nothing, a recent global report also cited them as the most trusted nation on earth....Cormac

Yes, well that's about par for the course, for Greece and most underdeveloped countries. The gap between legislation and reality has always been massive -- and all of Europe has known this for a long time. That is one of the basic reasons that the State has to be reformed as opposed to privatised: the legislative acts have to be implemented and enforced by state inspectors and the legal system. That is not going to happen on its own, and requires a real political commitment and also expenditure on training and some new government jobs (not necessarily extra government jobs, but it will cost money). Basically, the Troika was not serious about reforms, and even if they did want some, were not prepared to allow any money to be spent on them. Reform on the cheap, might be their slogan.

The author is admiring the ability of Germans to prioritise their interests over others. Indeed, that is exactly what they have done within the eurozone; they created a structure that would benefit Germany and damage other weaker economies. It was as inevitable as night follows day that many countries (with over-valued exchange rates and cheap credit) would be damaged by monetary union.

Of course, if you subscribe to neoliberal thinking then you will consider this to be fine: let the weaker and stupider people fall into poverty and debt. Quite frankly, we can do without this sort of selfish arrogance. It is not significantly different from German mainstream thinking in the last great depression. I do not think I have to remind you of the outcome of that serious collapse of morality and humanity.

I don't subscribe to neo-liberal thinking, I think it is unfair that if I offer an alternative view to yours then I am immediately labelled as a neo-liberal.....I trust Germany, many don't including yourself, but my experience of Germany has only been positive and I have seen nothing yet to change my view on this, I understand there must be great pain in Greece as there was here but the reforms that are required for Greece will ultimately liberate their generations to come, is this not a prize worth achieving....Cormac

@Cormac: I did not actually accuse you of supporting neoliberal thinking: I was just pointing out that neoliberals are fine with this sort of argumentation.

As far as Germany is concerned, I largely have very positive personal experiences. But I do not trust Germany to do the right thing for Europe -- any more than I would trust the UK or Greece to do so. In fact, my view is that Germany should not be in the position of being asked to manage the eurozone, and this is the primary cause of the aggravation with Greece. Europe needs a supranational institutional arrangement instead of this incoherent mess of national governments.

@ Xenox: "In fact, my view is that Germany should not be in the position of being asked to manage the eurozone" - I can guarantee you, most Germans view it the same way. It is nearly never good if you have one countries guiding a whole continent. But I even don't think that is happening.

"Europe needs a supranational institutional arrangement instead of this incoherent mess of national governments."Again I totally agree with you. But I think we already have exactly that. Or how would you call the "Euro-Group"?In my opinion it is a group of 19 finance ministers of the Euro-countries, all from democratically elected governments. Quite interesting, the opinion scheme in some regards seems to b 18 versus 1.I really don't understand the fixation on Germany, as there are 17 other democratically elected governments around with broadly the same position.

@Roger. WE probably agree on most of these things -- and I am aware that most Germans share my view that they should not be asked to manage the eurozone.

Why the fixation on Germany? The answer is simple; and here I am also aware that the German people do not grasp this fact. Germany has from the outset of the eurozone crisis directed the policy of the crisis management -- originally sharing that role with France, now shouldering it almost alone. This has been worsened by the self-made role that Schaeuble has chosen to adopt for himself -- with his own very poor grasp of economics.

The solutions? Politically (in European politics, not in domestic German) the best action would be to remove Schaeuble as Finance Minister. Economically, the first choice would be for a federal eurozone management that behaved responsibly and incorporated a fiscal union. The second choice would be for Germany to quit the eurozone and abandon the silly idea of the euro as the currency for Europe (as stated in the last Treaty revisions). I do not expect any of these three to happen; and I do not expect any resolution to the European political and economic crisis. Things will just get worse and worse.

@ Xenos: Even if I do not share your criticism on schaeuble - he is just one of 18 voices, without any veto-power. And I respect him, because he is less double faced than most other politicians I know, perhaps even in contrary: Inside Germany he was one of the most ardent advertisers for solidarity and financial helps for Greece (on the risk of damaging his popularity with German voters), toward Greece he was and is demanding more rewards for this financial help (on the risk of damaging his popularity with Greeks). He is telling all the peole what they DONT want to listen, but what is important to be said. I respect politicians more if they do not talk say every audience what they likes to hear but point to open problems. Even if they are sometimes as choleric as Schaeuble.

I also see a deepening financial union as one way to repair the problems of the euro-zone. But that has a price where I do not know if (and how many) Euro-countries are willing to pay it: They have to give up even more souvereignity rights away from the nation toward Europe, toward a round of competing opinions.As the Euro was planned and later created and the central bank was defined to be free and NOT beeing the station that prints money for free if national governments wreck the bilance, everybody knew the contracts. Every country joining Euro-group knew they loose their souvereignity to print money if the government feels to do so. OK, that rule was more easy to adapt for Germany as they were used to live with an independet central bank (one of the secrets of the strong DeutschMark, by the way). Some countries had to learn the price of this rule in the last years, the hard way, and for the greek society this price may be too high, this rule may be too hard to comply.

Realizing some losses of souvereignity, that demand a change of governmental styles, are really hard to learn for some countries - is it already at the time to further deepen the financial union? Will all countries be able and willing to pay these prices again. Especially the (southern) countries that suffered most during this crisis, that are still full of wounds? I fear in the beginneng all like the idea, but afterwards, when the prices are fully visible, it will be painted again as a bad-minded conspiracy from mighty Germany.

By the way, I do not see Germany alone leaving the eurozone. Germany will not voluntarily choose a way that distracts it from it neighbors like France, Netherlands and so on. History has shown us that for the peaceful safety of Germany and Central Europe it is indispensable to closely cooperate with its neighbors as good as possible and not taking solitary and seperate paths in such important questions. Only Germany leaving the Euro would lead toward a seperate national path for Germany that nobody wants.

@Roger. I am afraid that the empirical evidence shows pretty clearly that Schaeuble is running the EuroGroup. There is even footage of the Dutch idiot going to ask for his permission to discuss a Varoufakis proposal at the beginning of the first meeting, and a refusal from him. Then another (German) proposal was placed in front of Varoufakis, while the Commission and Greek proposal was shelved. By Schaeuble.

Nor do I think that Germany will leave the eurozone, because it is making far too much money out of it. They would prefer to destroy Greece. This is not about nationalisms or party politics: it is naked money-grabbing, in the time-honoured tradition. Indeed, the whole eurozone debacle has been a fight about who loses most -- and the primary protection went to German and French banks. Now that they are relatively safe, Germany feels able economically speaking to throw Greece away. Politically is another matter.

I regret that I do not share the common rather tolerant German view about Schaeuble. I actually think that you are all deluded -- and it would not be the first time that you have made a serious error of national judgement about a politician. We can say the same about Thatcher in the UK -- terrible damage to our country, and massive error of judgement by ordinary voters.

On the other hand, I would not want Germany to distance itself from the EU. My position is that it has to take a less powerful but still important role -- as it did from roughly 1960-1989. Its current dominance is very bad for Germans as it is for the rest of us.

Thanks for the paper. I post the paragraph you mentioned below because I think it's a very important paragraph to understand today's situation.

"Having achieved the nominal convergence of the Greek economy with that of the European countries, Greece needs to take advantage of the opportunities provided by monetary union. Real convergence needs to progress by improving competitiveness in product markets, flexibility in labour markets, and reducing the fiscal deficit and the debt-to-GDP ratio. Market deregulation, privatisations, more efficient utilisation of EU resources for a substantial upgrading of social and economic infrastructures, access to the information society and improvement of public administration productivity, should be regarded as priorities of economic policy, to be pursued in the era of EMU participation in order to achieve real convergence".

I suppose you know the swabian saying "Nit gschompfa isch globt gnuag" or the highest praise of Brandenburgers and Berliners "Da kannste nich meckern". Germans already understand your high opinion of our country by NOT hearing you "granteln" about Piefkes. ;-)

So please dont push too hard praising Germany in so many articles - not in a blog regarding Greece and especially not in such an intelligent blog about Greece.I even do not think it is a appropiate picture to draw a contradiction just between Greece and Germany, while we have 18 countries steering into one direction and just one country steering into the opposite direction.

Among the questions that interest me much more is why the voters in just one single country decided to take such a different way of all the other 18 countries. Did they find any philosophers stone the people in all others 18 countries are unable to see or what the heck is going on with them?

And thinking on: How can, how will Greece restart and rebuild their society from the cratch after crashing? I think these days this question is getting more interesting that the observation of the more and more inevitable graccident.

As we Germans had to learn there is never an end in history. You can always restart, but you always have to pay a price not only for your own sins and actions but as well for these of your anchestors.Life will go on, also for Greece after a more and more probable graccident - but what are the best directions to take afterwards? And how will Greece be able to carry the burden their ancestors gave them?

After having spent two years studying the reasons how it came to this Greek tragedy and thinking about how it could become better, I came to the conclusion that only a Greek Lech Walensa could trigger the necessary changes.

To my big surprise, this idea expressed in many commentaries never caused any reactions. This kind of narrow perspective is also prevalent in isolated regions of the Swiss alps. These indigenous tribes make up their own mind and resist most foreign approaches.

Therefore I do not have any doubts left, that the Greek population must find their own way out of the mess, without further money or help forced upon them.

Of course this kind of independence from the rest of the world prevents being a member of the monetary union of the Euro.

Consequently I do not see Grexit as an accident, but as the only way how Greece can restore it's independence, freedom and self esteem.

Maybe that after Grexit Tsipras can take part of the role of Lech Walensa, we will see.

One theme keeps coming up again an again, namely that Germany created a structure that would benefit Germany and damage other weaker economies. I responded to that on innumerable occasions. I will try again with a practical example.

Think of Greece and Germany in terms of balance sheets. The Greek balance sheet would show liabilities (debt) of about 320 BEUR. The German balance sheet would show assets (loans) of about 80 BEUR of that total debt. In normal times, the Greek P+L would show interest expenses for the debt and the German P+L would show interest revenue on the loans.

Now, what happens if Germany forgives Greece its entire 80 BEUR? Debts and loans are wiped out via the respective P+L statements. The Greek P+L shows an extraordinary gain of 80 BEUR and the German P+L an extraordinary loss of 80 BEUR.

There is no upside to Germany. Even if Greece were to repay the entire 80 BEUR, there wouldn’t be a gain to Germany’s P+L because the repayment would only eliminate the loan asset. But Germany has a gigantic downside, namely the extraordinary loss for which no provisions have been made as yet.

There is no downside for Greece. Even if none of its debt is forgiven, there wouldn’t be a loss to its P+L because the debt is already there. But Greece has a gigantic upside, namely the extraordinary gain of 80 BEUR if Germany forgives the debt.

To sum up: Greece has no downside but a gigantic upside while Germany has no upside but a gigantic downside. Could someone explain to me how Germany created a structure which benefited itself?

Now some will say that Germany had the great benefit of exporting to Greece. If my information is correct, it just so happens that German exports to Greece were just about in the area of 80 BEUR during the first 10 years of the Euro which is the amount of debt which Germany would forgive in the above scenario. Put differently, Germany would give away 10 years of exports free of charge. Can someone explain to me how giving exports away free of charge is a beneficial business model?

Klaus, I wonder why you take again all these efforts to explain the details.

Those who loudly express their different view do not base it on hard financial facts but on their emotionally based view of the world. This is the same mechanism that governs religious believe. It never is based on facts but on believes.

So if you want to change it, you must change beliefs, and that is known to be extremely difficult. I'm sorry to say that most probably you will not succeed.

@Klaus. You make the error (as many do) of seeing a monetary union purely in terms of national economies, and their national accounts. This is not the case. A monetary union means that the sovereign right of every country to print its own money, manage its exchange rate, influence its macroeconomic variables via monetary policy and fiscal policy, have all been relinquished. They are no longer discrete economies which freely trade with each other, and also allow free movement of capital and people.

The policy framework that is set, and the behaviour of the new central bank, are central to how those "local/national) economies function. If there are major variations in economic performance (such as those between northern and southern Italy, or Germany and Greece) then a common currency has serious implications. One of those implications is that the weaker regions will become uncompetitive and unable to export either within the common currency zone or without. Rapidly, they will lose production capacity, employment and economic health. This can (theoretically) be offset by utilisation of access to cheap capital and benefiting from the lower costs of production that should pertain with economic decline.

Of course, what Germany expected (and got) from the eurozone was a lower exchange rate than the DM, which combined with their reduction of wages and pension reform at the same time gave them a real competitive advantage for exports -- both within and without the eurozone.

So, from the outset the euro was guaranteed to benefit Germany, and very unlikely to benefit Greece and any other less developed economy unless that country was able to utilise access to cheap capital immediately and usefully, along with minimising the abuse of cheap money for consumption goods. Having said that, the main problem for Greece was public sector debt, whereas for the other indebted countries it was private sector debt, especially concerning the housing market and financial services. That alone marks out Greece as an unusual case, and also helps to explain why Greece was the first victim of the eurozone.

As far as your last question is concerned, why should Germany "give away exports free of charge"? This is an invalid question. The issue is that Germany cynically allowed weak economies into the euro (and bribed officials to push Greece in quickly) in order to achieve high export levels. The benefits to Germany have been created by the costs to Greece and others -- namely, lost productive capacity, decreased competitiveness since 2000, and the very serious damage inflicted by the foolish policies of austerity since 2010. In plain language, Germany has not made its economy competitive on its own terms, but on the back of the eurozone and explicitly on the backs of the weaker eurozone economies. Germany is no longer a nation state, but a nett beneficiary of a monetary union and should have been obliged from the outset to agree to fiscal transfer from surplus countries to indebted countries, when needed. It is now urgently needed.

My last comment does not imply that Greece does not need economic reforms. But Greece does not need the mindless neoliberal stupidities that have been forced on it by the Troika, along with economic contraction in order to service debt. Far from reforming, these have damaged Greek productive capacity.

@ Anonymous at 9.05 - 1 of 2When my wife comes home from a shopping spree and tells me how much money she saved by buying special offers, I ask her what she will do with all the money she saved (she didn’t ‘save’ any money, she only spent less).

When you think you spent less, you have to have a base to compare it to. My wife compares it to the official shop prices. The Kiel institute uses a “benchmark scenario” that uses average yields in the decade before the crisis as a basis. The government would probably compare actual interest expense to budgeted interest expense. Or you can compare this year’s interest expense to that of previous years. So you may say Germany spent less interest relative to the “benchmark scenario” or relative to the budgeted figure or relative to previous years or relative to the moonrise. It’s your choice.

Fact is that interest rates in USD, Euro and CHF are much lower today than anyone could have expected a few years ago. Thus, EVERY borrower spends less on interest (or ‘saves’ relative to a higher base). It may be that Germany spends even less-less than others but ALL the others pay less.

Now, the Kiel institute says that interest rates have come down because of the crisis, thus Germany & Co. are beneficiaries of the crisis. The South suffers and Germany has to spend less on interest. Sounds plausible but that would apply to the US and all the other countries which today can borrow at rates close to zero when, a few years ago, they had to pay 2-3% and more. I have a bit of a problem with that math for the following reason.

When Germany spends less on interest, it doesn’t spend more on other things. Instead, it is only easier for Germany to bring their budget in balance (or even surplus) which is their stated goal. No German citizen has a direct benefit of the state’s spending less on interest unless the state increases its spending on other things in an equivalent amount. Put differently, if Germany had to pay higher interest and thus had a budget deficit, it would only borrow more but not cut pensions.

The other aspect is the socalled ‘flight to quality’. Whenever there is a crisis, investors go for quality. Should a real big Euro-crisis happen, there is likely to be a huge flight into the CHF and Swiss interest rates will become even more negative than they are now. Germany is a beneficiary of this ‘flight to quality’ but so is everybody else who has quality. That benefit is not unique to Germany.

Remember: low interest rates are good for borrowers and bad for savers. Whatever the German state (and other states) may have benefited from lower borrowing rates (which benefits the citizens don’t necessarily see), Germany’s (and other countries’) saving citizens have paid dearly for that. Just like there are hypothetical calulations as to how much the German state saved in interest expense, there are calculations about the huge amount which German savers have lost due to low interest rates.

This was a long way of saying that I don’t really buy into these arguments of ‘saving’ interest expense at the expense of other borrowers. If anything, any such ‘saving’ on the part of the state comes at the expense of the savers. Still, if one followed this argument, one would really open a pandora’s box because it would apply to virtually all high-quality sovereign borrowers and no-one is going to expect the, say, USA to spend money on troubled countries because they are saving so much interest expense due to the troubled countries. I am not saying that the Kiel institute is wrong. All I am saying is that no one can prove what exactly the correct ‘benchmark’ would be today, thus any savings calculation is academic.

@ Anonymous at 9.05 - 2 or 2It is different with the Euro exchange rate against third currencies. There is absolutely no doubt that a Deutsche Mark would trade much higher than the Euro does. The Euro trades lower because the EZ includes weak economies. A lower Euro means easier exports for Germany. Thus, one could reasonably argue that a certain portion of Germany’s exports receipts are actually due to others and should be recycled. But let me ask you: who should do the recycling? The state perhaps? Of course, not, because the state does not get the exports receipts. It is the exporting industry which gets the export receipts and short of implementing a tax on exports, I wouldn’t know how the state could get its hands around those export receipts. And a tax on exports in today world? Maybe yes, maybe no…

Mind you, there are some important Germans who argue that the weak Euro has actually hurt the German economy because it made it far too easy for German industry to export. Thus, there was not as much innovation, productivity incease and investment as during the times of the Deutsche Markt and, in the long turn, that will do great damage to the German economy. Hans-Olaf Henkel is the most prominent supporter of this thesis.

Suppose, in theory, that one could indeed prove that Germany benefited 80 BEUR from Greece’s crisis and should give that money back to Greece. Sounds as convincing as Paul Krugman sounds when he says that no one should worry about the US debt because “we owe that money to ourselves”. Yeah, that may be true but it ignores the issue of ‘different pockets’. The benefit of Germany’s export success goes into the pockets of the exporting industry whereas any transfer payments to Greece would come out of the pockets of the state, i. e. the pockets of all tax payers.

@Klaus. Who should do the recycling? The same people who created the eurozone, obviously. Without that state action, the exports would not be as healthy as they are now.

And I do agree that the undervalued X-rate has damaged German investment and productivity increases. It is also linked with seriously deficient R&D (strange, for a country with Germany's history) and very weak domestic demand (owing to low wages alongside income distribution problems (again, strange for the country with historically the greatest income equality after Sweden). There is in fact a lot wrong with the German economy now, and the German politicians have no plans to address those problems. This is a large part of the popular opposition to fiscal transfers to Greece: the German people do not feel wealthy (since they are not): it is big business and subsidised banks that are wealthy.

"One theme keeps coming up again an again, namely that Germany created a structure that would benefit Germany and damage other weaker economies. I responded to that on innumerable occasions."

@KlausThere are a number of commentators around here who simply hate Germany and the Germans. They are so predicable. It's not even funny anymore. And, as H. Trickler pointed out, you cannot argue with their "emotionally based view of the world".

I regret to tell you that the supporters of the German position are rather more emotionally based than the economic rationalists, who are advocating a logical structure for the eurozone and for management of the eurozone crisis.

And I can agree: it is not even funny any more to see how irrational much of the debate is. Germanic Protestant moralizing about hard workers versus the lazy Mediterraneans may go down well with Germans, but there is a limited northern European Protestant audience.

@ Herr Trickler: It is not a surprise that you consider your own opinions (backed up by no theoretical knowledge of economics or practical experience of the eurozone) to be superior to that of others.

What precisely you think is a "world view" is likely to be a rather narrow and personally based perspective that the vast majority of ordinary people and intellectuals will not agree with. Moreover, your claim that my educated perspective is "incurable" is both insulting and arrogant. You are free to disagree; you are not free to make incorrect analogies with medical conditions.